Bloomberg & Forbes articles takeaway: NG is the only option to save US oil industry

Updated: Bloomberg & Forbes articles takeaway: NG is the only option to save US oil industry

Most rigs drill for both oil and natural gas. Low natural gas price in 2012 is mainly due to about $100 oil during 2010 ~ 2014, with natural gas as zero cost by-product at 2012. Current situation is very different from 2012: persistent low oil price as well as low NG price will make shale drilling unprofitable for most wells in US which can be confirmed from the 48% sharp drop of rig in last 4 months. The continue rise of shale oil/gas output is mainly due to the rig cut of Dec 2014 was still not big (shale pad/wells takes about 3 months to finish) and the shale gas industry has productivity increase of about 10% per year. Nevertheless, we should see Jan~Feb 2015 reduction to start to impact April~May output. EIA & Forbes made similar prediction at the following:

Oil industry need at least one of oil or NG to be profitable, but we see oil unlike to bounce much. Blanch, the top Brent forecaster in the fourth quarter according to data compiled by Bloomberg Rankings, said by phone Thursday from New York. “The international market will be very well supplied even when the situation in the U.S. changes.” which mean Oil will be dragged down by Saudi/GCC/USA to pressure Iran/Russia for both nuke/Yemen/Syria. that leave only NG as the only option to save US oil industry.

US natural gas production cost b/t $2.75 to 6, average $4.85; current price at $2.67. As drilling rig has drop 45% (50% for both US and Canada, or north America production could drop 40% giving time) . In addition, most recent drop has been in Texas and around Henry hub. recent net oil production and net gas production have been showing sign of peaking. Iran has been painful for too long, not likely to fight a war with Saudi. low oil price will stay and will put pressure to reduce drilling and benefit price recovery of NG. The rapid rig cut means that the price of NG is not worth the investment and the production will be cut to force up the price. Low oil price accelerates this process.

Holding UGAZ, UWTI, RUSL has some benefit: they are index and not likely go to zero, as they are stressed heavily and they provide big upside; But price similar options and trade fee less than option.

Updated 10am, Mar 17, 2015:

in Goldman Sachs+IEA+WSJ reports: shale output will not down due to tech improve, OPEC is game over, IRAN will flood oil, terrible! very scary……every sensible and logic person would have sold UWTI and USO, sold $UGAZ at 2.84 and bought UWTI at $1.91. $UWTI down 30% in last 3 days after GS+IEA+WSJ reports. We think Dec rig cut will show impact on April, nothing can change fact that US shale oil has production cost $60~80. at $40, market will force US oil rig cut sharply and drive price about cost of production.

updated 12pm, Feb 24, 2015

Natural gas price in places that is far from Henry Hub, has been surging

Shale oil/gas firms need at least one of oil and gas production to be profitable. Looks like Putin is not going to leave Ukraine, Western countries are going to inflict pain on him while Israel and Saudi Arabia want to pressure Iran to give up nuclear weapon…….oil price is going to stay depressed as David Cohen now vice CIA director specialized on depressing oil price. In addition, China‘’s house, credit bubble are bursting and will drag all EMs with it. Greek and Spain in chaos; and EM and EU will hurt each other and drag each other down. Oil can go 20$ as Goldman Sachs predict. High natural gas price is the only path to profitability and viability, rig will continue this sharp drop until price above cost ($4.85), and it will be a gigantic trends that will last months and years. Thus buy UNG, UGAZ at or below current level (14.64 UNG, ￥3.25 UGAZ, we successfully predicted the bottom of UNG and UGAZ, check http://www.vcoolinfo.com/?p=5968 and at stocktwits and our facebook pages for initial publish at Feb 9th here: https://twitter.com/topcools_com, when UNG price at 13.2, the exact bottom).

Given excessive print by each central banks and excessive liquidity in financial system, but no both cheap and safe asset in global market(US P/E above average already, while other part in danger of recession or war), we think there is a strong case for safe, isolated, but far below cost of US natural gas. The only way to increase price is reducing active rigs which are in the sharp declining. Thus we are closing to the point of price increase. Details:

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1. Dream of U.S. Oil Independence Slams Against Shale Costs: a few quotes: “The path toward U.S. energy independence, made possible by a boom in shale oil, will be much harder than it seems. Independent producers will spend $1.50 drilling this year for every dollar they get back. Shale output drops faster than production from conventional methods. It will take 2,500 new wells a year just to sustain output of 1 million barrels a day in North Dakota’s Bakken shale, according to the Paris-based International Energy Agency. Iraq could do the same with 60 wells…….Shale oil is expensive to extract by historical standards and only viable at high-enough prices, Ed Morse, Citigroup Inc.’s head of global commodities research in New York, said by phone Sept. 23. Oil from shale formations costs $50 to $100 a barrel to produce, compared with $10 to $25 a barrel for conventional supplies from the Middle East and North Africa, the Paris-based International Energy Agency estimates.” source: http://www.bloomberg.com/news/articles/2014-10-07/shale-boom-tested-as-sub-90-oil-threatens-u-s-drillers （due to treasury and CIA are artificially suppress oil price after Ukraine conflict, see here, thus we think data before Ukraine war is more accurate).

It is no wonder to see weekly drop of rig very dramatically, although there are about 3 months process to drilling a pad(4~8 wells), so the output will lag the rig cut for about 3 months.

2. About the natural of fracture drilling:
Hydraulic fracturing is a very complex and expensive process used in nine out of 10 natural gas wells in the United States, where millions of gallons of water, sand and chemicals are pumped underground to break apart the rock and release the gas.

Hydraulic fracturing is not only complex and expensive, its output drop very fast:

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